"An explanation between the classification of organizations for federal and state tax purposes."

TAX RULING 2002-*

DATE: MARCH 20, 2002

SUBJECT: INCOME TAX; CORPORATIONS; EXEMPTIONS; CASH MANAGEMENT
30 DEL. C. § 1902(b)(8)

The Division of Revenue received requests for advice on the liability of corporations with a business presence in this State for income tax under the facts described herein. The purpose of this ruling is to advise similarly situated taxpayers of the Division’s interpretation of Delaware Law as applied to these facts.

LAW:

Title 30 of the Delaware Code, Section 1902(b) lists several exemptions for exemption from the income tax on corporations. Among these is the exemption at paragraph “(8)”.

30 Del. C. § 1902(b)(8) reads as follows:

“Corporations whose activities within this State are confined to the maintenance and management of their intangible investments or of the intangible investments of corporations or business trusts registered as investment companies under the Investment Company Act of 1940, as amended (15 U.S.C. 80a-l et seq.) and the collection and distribution of the income from such investments or from tangible property physically located outside this State. For purposes of this paragraph, “intangible investments” shall include, without limitation, investments in stocks, bonds, notes and other debt obligations (including debt obligations of affiliated corporations), patents, patent applications, trademarks, trade names and similar types of intangible assets;”

FACTS:

Existing organization and operations:

Corporation “Parentless a multinational corporation with operating subsidiaries in North America, including the United States. Among the subsidiaries are corporations “Operating Company Sword”, “Operating Company Gold”, “Operating Company Juno”, “Operating Company Omaha”, “Finance Corporation”, and others.

Currently the cash needs of the United States operating affiliates (Operating Company Sword, Operating Company Gold, Operating Company Juno, Operating Company Omaha) are

managed through its own cash management system. This includes disbursement accounts for vendor payments and lock boxes for customer receipts. Operating Company Sword, Operating Company Gold, Operating Company Juno, and Operating Company Omaha also have separate concentration accounts at “Money Center Bank”. For these subsidiaries, all entity activity is first cleared through their concentration account.

The daily cash position (additional cash needs or any excess cash) is first computed for each of the operating subsidiaries. All of these companies have inter-company borrowing and inter-company lending agreements in place with Operating Company Sword. (Operating Company Sword currently receives funding via direct loans from various external financial institutions and from Parent in abroad). Any daily excess funds in these companies are used to pay down their borrowing from Operating Company Sword or increase their investment at Operating Company Sword. Any deficit in these companies, (where additional cash is needed), is obtained from Operating Company Sword. Operating Company Sword represents the only short-term (less than one month) borrowing and investing source for the North American operations. At the end of each day, the net position of all these entities resides in Operating Company Sword. If this net position is excess cash, Operating Company Sword will pay down the overnight borrowing with Money Center Bank. If the net position at the end of the day shows additional cash is needed, Operating Company Sword will fill that cash need by borrowing from Money Center Bank under committed and uncommitted facility lending agreements.

Proposed organization and transactions:

The following is the proposed organization changes and process to provide funding to affiliates:

“Finance Corporation” is a Delaware Corporation, the purpose of which will be to finance the cash needs of North American affiliates, to manage its surplus not invested with affiliates, and to invest such surplus in short-term maturities.

The external funding process currently performed by Money Center Bank and other international banks would instead be performed by a substantial cash infusion in the form of an arms-length, inter-company loan from Parent. This infusion would be made through Finance Corporation, the proposed Delaware Holding Company. Finance Corporation would in turn perform the net daily inter-company settlement role currently performed by Operating Company Sword. Any cash in excess of daily inter-company needs would be invested for very short maturities. A substantial core level of lending would always exist between Finance Corporation and the affiliates. A remainder over or under the core would exist only as a function of the seasonal needs and intra-month cash flows at the affiliates.

The result of this exercise is that the affiliates will be availed of the preferential rates that can be offered by Parent by passing the rates through Finance Corporation. The goal of Finance

Corporation is to minimize, within prudent limits to preserve funding flexibility, the amount of funds that are not lent to the North American operations. There are strong cost incentives in the form of negative interest rate costs to fulfill this goal.

II. RULING REQUESTED:

The issue presented was whether or not the described activities qualify the applicant (Finance Corporation) for exemption from corporate income tax under § 1902(b)(8).

III. DISCUSSION:

Delaware law exempts from income tax “….. Corporations whose activities within this State are confined to the maintenance and management of their intangible investments or of the intangible investments of corporations or business trusts registered as investment companies under the Investment Company Act of 1940, as amended (15 U.S.C. 80a-1 et seq.) and the collection and distribution of the income from such investments or from tangible property physically located outside this State. For purposes of this paragraph, “intangible investments” shall include, without limitation, investments in stocks, bonds, notes and other debt obligations (including debt obligations of affiliated corporations), patents, patent applications, trademarks, trade names and similar types of intangible assets”.

The statute provides no precise definition of “investment” except for the non-exclusive list of securities and certain intellectual property. We are unable to distinguish corporations claiming exemption under the statute from other corporations solely on the basis of the term or purpose of loans made to their affiliates. We cannot determine that the statute does not permit loans of the nature and duration described in Finance Corporation’s request.

IV. RULING:

After considering the law and the facts of this case, it is the ruling of the Division of Revenue that, Finance Corporation under the facts described herein, will qualify for exemption from Delaware’s corporate income tax under 30 Del.C. § 1902 (b)(8).

Please contact Donald J. Bromley at (302) 225-5164 or dbromley@delmgt.com if you would like further information or to discuss how Delaware Management Services can serve you.

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